April’s alarming spike in the annual rate of inflation from 3.1 percent to 4.5 percent undoubtedly adds ammunition to the arsenals of people who are concerned that Bermuda’s economy is badly overheating.

Opponents, who may well see this as a one-time increase, will respond that the primary drivers of the increase were a major increase in the fuel adjustment clause for electricity and the cost of overseas travel — two segments of spending over which Bermuda has little control. These different views are of course the reason that US President Harry S Truman wanted a one-handed economist.

Nonetheless, the increase, and Bermuda’s reasonably high historic inflation rate, should be cause for concern because it must make Bermuda less competitive, at the same time that inflation tends to drive itself: Prices rise, fuelling demand for wage increases, which in turn drives up prices, and so on.

Bermuda’s inflation rate consistently runs ahead of its two major trading partners, the US and Canada. That means businesses and visitors seeking services from Bermuda will be paying more, and the question is how long the Island can sustain this. The argument for an overheated economy is basically this: The more money there is in the economy, the more likely it is that prices will rise, because demand (money supply) is rising while supply (the number of goods for sale) remains basically static.

This may well be overly simplistic, but it is essentially the truth. So the only way to slow down inflation is to slow down the rate of growth in money supply. With international business growing and the tourism industry improving, along with associated booms in construction and so forth, that’s hard to do. Basically, Bermuda is awash in cash, even though the average consumer may not be.

So slowing down inflation requires increasing interest rates to reduce the amount of borrowing and capping wage increases (because that reduces money supply). So far, there is not much sign of the latter happening, and while opinion may be divided on the merits of the teachers’ demands for more money, the Government’s attempt to cap a second year’s pay at four percent has some merit from an economic point of view.

As it happens, the Ministry of Finance does not believe the economy is overheated. It says its “heat gauge” shows there is a reasonable balance between the demand and supply of goods and services in Bermuda’s marketplace and that the recent spike is due to outside influences. It adds that the underlying rate of inflation for the past 12 months is 3.3 percent, which is within its target range.

It also says that it would be premature to take any steps that might reduce economic growth. On that point the Ministry may be right, because anti-inflationary measures can be damaging to the overall economy, or are simply unavailable to the Government.

One such method is using interest rates to control inflation. This is out of Government’s control because there is no central bank and because the local banks tend to follow the example of the US, whose needs may be different from the Island’s. In recent years, when the banks have veered away from the US, it has been mainly to offer lower interest rates and easier credit, the result of which has been to drive up demand for housing and the like, thus making the Island even more expensive.

The goal here should be steady growth, not runaway growth, especially given the Island’s unusual economy and labour market. There is no great pressure in Bermuda for jobs creation because there is virtually no unemployment. Indeed, new jobs will almost certainly be filled by non-Bermudians, and with that comes more demand for housing, transport, services and the like.

However, there does not seem to be sufficient concern about the Island’s competitiveness — in spite of warning signs like the establishment of subsidiaries of local companies in Halifax and elsewhere — and with an election due, it is hard to see the Government actively reducing money supply. Indeed, as with rent control, some members of Government still seem to be stuck on the idea that the way to control inflation is control prices, in spite of the fact this has been an abject failure everywhere it has been tried. Still, if it is too early to take active anti-inflation measures, no one should be in any doubt that this is something that must be watched closely. An ounce of prevention now will be better than a pound of cure later.